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Volatility Spillovers in Korean Financial Markets(Vol.7 No.2)

연구조정실 (Tel: 02-759-5407) 2004.12.13 9934

Volatility Spillovers in Korean Financial Markets(Vol.7 No.3)

Ok-Ja Yoon

Economist, Financial Stability Analysis Team, Banking Institution Dept., the Bank of Korea(Tel: 82-2-750-6820, E-mail:yoj@bok.or.kr)

Kyu-Ho Kang

Economist, Research Planning & Coordination Team, Institute for Monetary & Economic Research, the Bank of Korea(Tel: 82-2-759-5407, E-mail:kyuho@bok.or.kr)

  As regulations in financial markets have been substantially alleviated through the financial liberalization and market opening following the currency crisis, asset price indicators such as interest rates, the exchange rate and stock prices may reflect diverse information more efficiently. But at the same time, the increased volatility of asset prices may give rise to financial unrest.
  Based on a multivariate GARCH model, this paper studies volatility dynamics in bond, foreign exchange and stock markets and examines whether there exist volatility spillovers across three markets in pre-crisis and post-crisis periods.
  The results show that there are volatility spikes where volatility increases in the short term and promptly returns to the average level in all three markets.  Average volatility levels are substantially higher after the crisis than in the pre-crisis period. From the aspect of volatility spillover, a shock occurring in a particular market is found to be transmitted to other markets instantly in the post-crisis period when market linkages have been augmented due to financial liberalization and capital market opening. The stock market, especially, is estimated to play a leading role in inter-market volatility spillovers. This is attributable to the fact that most of the flow of foreign capital for portfolio investment since the crisis have flowed into the stock market.

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